Mr
Sen has plans of availing a loan of US $ 1million from M/s X bank Ltd
30 days from now—01.03.2012. With prices on the rise he expects the
US FED. to contain Inflationary tendencies by HIKING Repo and
Reverse Repo by 100 basis points before he avails of this loan. He plans to
repay the loan in 6 months time. Mr Sen being wary of the Inflationary
conditions seeks your help in structuring the best deal for him.
Answer
the following---
1)
Outline the broad plan you may
have for Mr. Sen describing the plan in the terminology you think would aptly
describe it.
Answer
: In this case I would plan an FRA for Mr. Sen. The plan is as follows:-
Mr. Sen knows that he will need to borrow $1
million in 1 month’s time for a six-month period. It can borrow funds today at
LIBOR + 50 basis points. LIBOR rates today are at 0.74820 % but Mr. Sen expects
rates to go up to about 100 basis points or 1% over the next few weeks. So Mr.
Sen will be forced to borrow at higher rates unless some sort of hedge is
transacted to protect the borrowing requirement.
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